OCR Rises to 2.75%: What Does It Mean for Your Mortgage?

For homeowners, the obvious question is:

Does this mean mortgage rates are going back up?

The answer is: potentially - but it is not quite that simple.

Why did the Reserve Bank increase the OCR?

The Reserve Bank's job is to keep inflation between 1% and 3% over the medium term, with a target midpoint of 2%.

While headline inflation has jumped to 4.1%, there is an important distinction beneath that number. Excluding vehicle fuels, annual inflation was 2.9% in the June quarter, and most measures of underlying inflation remain within the Reserve Bank's target range.

In other words, New Zealand isn't necessarily experiencing another broad-based inflation problem like we saw a few years ago.

Much of the latest increase has come from an external shock: fuel.

The Reserve Bank can't control the international price of oil. What it is trying to prevent is those higher costs flowing through the economy and becoming embedded in wages, prices and inflation expectations.

That is why it has started to gradually remove some of the stimulus created by lower interest rates.

Could the OCR increase again?

Yes.

The Reserve Bank has been reasonably clear that, based on its current forecasts, the OCR may need to increase further this year. However, it has also stressed that the future path is not predetermined.

The economy is still giving mixed signals.

Exports are performing relatively strongly and the Reserve Bank believes the economic recovery has resumed. At the same time, household spending remains weak, unemployment is elevated and flat house prices continue to weigh on households, particularly in Auckland and Wellington.

That creates a difficult balancing act.

Raise rates too slowly and inflation could become more persistent.

Raise them too aggressively and the Reserve Bank risks putting unnecessary pressure on an economy that is still recovering.

What does the OCR increase mean for mortgage rates?

An OCR increase does not mean every mortgage rate immediately increases by 0.25%.

Floating and very short-term interest rates tend to be more directly influenced by the OCR, while longer fixed mortgage rates are also heavily influenced by wholesale interest rates and expectations about where inflation and the OCR are heading.

That means some future OCR increases may already be reflected in mortgage pricing before the Reserve Bank actually announces them.

This is why making a mortgage decision based purely on the latest OCR headline can be a mistake.

The better question isn't simply:

"What do I think interest rates are going to do?"

It's:

"Which interest-rate strategy makes the most sense for my overall financial position?"

Should you fix your mortgage for longer now?

Not necessarily.

Trying to perfectly predict the bottom or top of an interest-rate cycle is extremely difficult.

Your decision should also consider:

• when each portion of your mortgage is coming off its current fixed rate;
• whether you expect to make lump-sum repayments;
• your current household cashflow;
• whether you are likely to sell, renovate or purchase another property;
• how much certainty you need around repayments; and
• how your mortgage fits alongside your wider wealth-creation strategy.

For some borrowers, fixing for longer may provide valuable certainty.

For others, retaining flexibility or splitting lending across different fixed-rate periods may make more sense.

The lowest advertised rate isn't automatically the best financial decision.

Don't lose sight of the bigger opportunity

There is another side to interest rates that often gets overlooked.

When mortgage rates fall, many homeowners immediately absorb the lower repayment into their lifestyle.

But if you have become accustomed to making a higher mortgage payment, maintaining that payment - even when the required repayment falls - can dramatically accelerate debt reduction.

Alternatively, the additional cashflow could be redirected toward investments or another part of your financial plan.

That is where an interest-rate change can become more than simply a cheaper mortgage.

It can become an opportunity to improve your overall financial position.

What should homeowners do now?

For most people, the September OCR announcement isn't a reason to make a sudden change.

It is a good reason to review the numbers.

If you have lending coming up for refixing over the next few months, look beyond simply choosing between a one-year or two-year rate.

Consider what you are actually trying to achieve over the next few years and structure the mortgage around that objective.

At MyFuture, mortgage strategy forms part of the wider financial plan. We look at your debt, cashflow, property, investments and long-term goals together — because a mortgage decision shouldn't be made in isolation.

AI and online calculators can give you plenty of options. The important part is working out which option is right for you — and then putting it into action.

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